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Fraud Workouts & Bankruptcy

What are my rights if a broker I work with goes bankrupt?


The Securities Investor Protection Corporation or “SIPC” is a special quasi-governmental corporation designed to oversee the liquidation of brokers. In the event of the failure of a securities broker, SIPC has the power to commence liquidation proceedings, and is empowered to seek in the first instance to transfer your securities account to a different broker. This is a seamless transaction for a customer. If SIPC is not able to affect a transfer of accounts, then the statute allows for a claim for the value of reported cash and securities due a customer on the date of the filing of the liquidation, less any debt owed to the broker. SIPA insures the first $500K in each account. The statute requires SIPC to advance promptly to each customer up to $500K of the value of securities held (up to $250K in cash) once a claim is approved. As additional money in the liquidation of the broker becomes available, the trustee distributes it to all customers on a pro rata basis until each customer is paid in full, before reimbursing SIPC on account of its advances.




What is a SIPA liquidation?


A SIPA liquidation is a special proceeding to wind up the affairs of an insolvent broker and ensure that their customers get prompt return of their securities and cash in a manner so as to avoid market disruption. Once a federal court determines that a broker should be liquidated, the wind-up proceedings are conducted under the aegis of a bankruptcy court under ordinary bankruptcy rules, except the SIPA statute contains special provisions aimed at ensuring broker customers are treated fairly and given priority over ordinary non-customer creditors of the broker.




Why is SIPA different from a regular bankruptcy?


SIPA liquidation proceedings are different from regular bankruptcies in four important ways. Brokers are not authorized to continue in business and must be liquidated. Customers are treated as a separate class of priority creditors. Transfer of the securities business of the broker if possible is a priority for the liquidation to enable most customers to have promptly and seamless access to their securities portfolios. And, the entire cost of the liquidation proceeding is advanced by SIPC rather than borne by customers.




How do I file a claim in a SIPA case to get my money back?


Promptly after a liquidation proceeding is commenced, the court will notify customers in writing of the right to file claims. In a SIPA proceeding, the court is authorized to provide a simple form and method for filing claims, a more informal process than in ordinary bankruptcy proceedings. Customers who have outstanding securities or cash held by the broker to the extent their accounts have not been transferred to another broker should consider filing a claim. In addition to customer claims, ordinary creditor claims are likewise subject to the same streamlined procedure.




When should I not file a claim? Are there risks in filing a claim?


Failure to file a timely claim presents a risk that your claim will not be considered. However, if there is a serious risk that you may be subject to a counterclaim, then before filing a claim, you should consult an attorney. There are important strategic risks in filing a claim. Filing a claim subjects you to bankruptcy court jurisdiction, and may waive important procedural rights, including the right to a jury trial should there be a dispute about your claim, or any counterclaim. Thus, if you believe that there is a risk of a counterclaim, then you should consult an attorney before filing a claim.





SIPA  (Securities Investor Protection Act): Special Procedures for Liquidation of Brokers

What are my rights if a broker I work with goes bankrupt?


The Securities Investor Protection Corporation or “SIPC” is a special quasi-governmental corporation designed to oversee the liquidation of brokers. In the event of the failure of a securities broker, SIPC has the power to commence liquidation proceedings, and is empowered to seek in the first instance to transfer your securities account to a different broker. This is a seamless transaction for a customer. If SIPC is not able to affect a transfer of accounts, then the statute allows for a claim for the value of reported cash and securities due a customer on the date of the filing of the liquidation, less any debt owed to the broker. SIPA insures the first $500K in each account. The statute requires SIPC to advance promptly to each customer up to $500K of the value of securities held (up to $250K in cash) once a claim is approved. As additional money in the liquidation of the broker becomes available, the trustee distributes it to all customers on a pro rata basis until each customer is paid in full, before reimbursing SIPC on account of its advances.




What is a SIPA liquidation?


A SIPA liquidation is a special proceeding to wind up the affairs of an insolvent broker and ensure that their customers get prompt return of their securities and cash in a manner so as to avoid market disruption. Once a federal court determines that a broker should be liquidated, the wind-up proceedings are conducted under the aegis of a bankruptcy court under ordinary bankruptcy rules, except the SIPA statute contains special provisions aimed at ensuring broker customers are treated fairly and given priority over ordinary non-customer creditors of the broker.




Why is SIPA different from a regular bankruptcy?


SIPA liquidation proceedings are different from regular bankruptcies in four important ways. Brokers are not authorized to continue in business and must be liquidated. Customers are treated as a separate class of priority creditors. Transfer of the securities business of the broker if possible is a priority for the liquidation to enable most customers to have promptly and seamless access to their securities portfolios. And, the entire cost of the liquidation proceeding is advanced by SIPC rather than borne by customers.




How do I file a claim in a SIPA case to get my money back?


Promptly after a liquidation proceeding is commenced, the court will notify customers in writing of the right to file claims. In a SIPA proceeding, the court is authorized to provide a simple form and method for filing claims, a more informal process than in ordinary bankruptcy proceedings. Customers who have outstanding securities or cash held by the broker to the extent their accounts have not been transferred to another broker should consider filing a claim. In addition to customer claims, ordinary creditor claims are likewise subject to the same streamlined procedure.




When should I not file a claim? Are there risks in filing a claim?


Failure to file a timely claim presents a risk that your claim will not be considered. However, if there is a serious risk that you may be subject to a counterclaim, then before filing a claim, you should consult an attorney. There are important strategic risks in filing a claim. Filing a claim subjects you to bankruptcy court jurisdiction, and may waive important procedural rights, including the right to a jury trial should there be a dispute about your claim, or any counterclaim. Thus, if you believe that there is a risk of a counterclaim, then you should consult an attorney before filing a claim.





Fraud Workouts & Bankruptcy